The Commodity Futures Trading Commission (CFTC) has now made it clear that, in its view, certain initial coin offerings (ICOs) within the United States or affecting U.S. residents may be within its jurisdiction. On October 17, the CFTC’s “LabCFTC office” released “A CFTC Primer on Virtual Currencies.” The primer does not describe the CFTC’s official polices or positions, and it does not have the force of law. The primer does represent, however, a public statement by the CFTC as to how the commission views ICOs, including ICOs of “utility tokens” that are not securities.
Historically, the CFTC has primarily exercised its jurisdiction over futures contracts and similar instruments, but it also has far-reaching enforcement authority over transactions in commodities, which are in turn broadly defined. The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Commodity Exchange Act to add Section 6(c)(1) and reinforced the CFTC’s authority. The new section expanded the scope of the CFTC’s jurisdiction beyond the historical boundaries of commodities futures and derivatives, clarifying certain statutory ambiguities, and, for the first time, granted the CFTC broad antifraud statutory authority over transactions in commodities themselves, including contracts for sale of commodities not involving future delivery. The CFTC subsequently adopted Rule 180.1, which, as the CFTC noted in the adopting release, was based on Securities Exchange Act Rule 10b-5. Rule 180.1 gives the CFTC a broad antifraud tool in connection with commodities, analogous to the antifraud tool available for many years to the Securities and Exchange Commission (SEC) in the context of securities. For example, the CFTC may use Rule 180.1 in situations where the disclosure used in an ICO involving a virtual currency is deficient or misleading, similar to the way the SEC uses Rule 10b-5 in connection with misleading securities offering documents.
The primer raises many interesting points, including:
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The CFTC reiterated that the definition of “commodity” is broad and includes “virtual currencies.”
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The CFTC believes that its jurisdiction is implicated when a virtual currency is used in a derivatives contract or if there is fraud or manipulation involving a virtual currency traded in interstate commerce.
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The CFTC does not claim general jurisdiction over spot or cash-market exchanges and transactions involving virtual currencies that do not utilize margin, leverage or financing. The CFTC does claim jurisdiction over instances of fraud or manipulation involving virtual currencies, even in the case of “spot” or cash-market exchanges and transactions involving virtual currencies that do not utilize margin, leverage or financing. This may include an ICO. The CFTC’s view of what constitutes a “virtual currency” is still unclear.
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The primer refers to the Securities and Exchange Commission (SEC) report on The DAO ICO and notes that there is no inconsistency between the SEC’s analysis and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivatives contracts depending on the particular facts and circumstances.
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The primer also notes that the CFTC looks beyond form and considers the actual substance and purpose of an activity when applying the federal commodities laws and CFTC regulations.
The primer and recent CFTC enforcement actions related to fraudulent ICOs make it clear that the CFTC is looking closely at ICOs that implicate its jurisdiction, and it appears that this scrutiny will continue.
The CFTC has not — as of yet — taken the position that ICOs are inherently flawed or that an ICO will necessarily lead to a CFTC enforcement action. In this respect, the CFTC’s public positions appear similar to the public positions of the SEC — both of these regulatory authorities are aware of the growing ICO market and have begun to issue nonbinding “thought statements” asserting their respective regulatory authority. Neither regulator has moved to shut down the ICO markets. All indications are that ICOs that are properly structured in compliance with applicable law and with appropriate disclosures and marketing materials and methods will be able to proceed. It is important to remember that ICOs potentially involve the application of multiple areas of law, including securities, commodities and broker-dealer regulation, tax, and specialized areas of financial regulation, such as currency transmission, KYC (Know Your Customer) and AML (Anti-Money Laundering).
